Israel has backed down from a threat of harsh sanctions in response to Palestinian moves to upgrade their UN status, deciding instead to maintain a “low profile”.

In recent months, accompanying a diplomatic campaign against the Palestinian bid, Israeli officials had threatened to stop the transfer of funds to the Palestinian Authority and even to declare the Oslo peace agreement null and void. However, recognising the battle is lost, Israel is taking a more conciliatory view, saying its response will depend on Palestinian actions after the UN vote. “There’s no need to issue statements. We’ll respond when the time is right,” an official said.

“I wouldn’t overstate the importance of the UN vote,” a senior Israeli official said. “True, we’re going to see fireworks in Ramallah, but the settlements will remain exactly where they are and the Israel defence forces will continue to operate in the same West Bank areas.”

Finance minister Yuval Steinitz said Israel would respond to the Palestinian initiative, the only questions being when and how strongly. “If the Palestinian Authority thinks that it can attack us so harshly at the UN and continue to benefit from co-operation with us on the ground, there are some surprises ahead for it on the schedule,” he said.

Among the punitive measures being considered is a proposal to deduct money owed by the Palestinian Authority to the Israel Electric corporation from the tax money Israel transfers to the Palestinians every month. Israeli officials have expressed disappointment that some EU states, including Ireland, have decided to vote in favour.